TREASURIES-U.S. Treasury sell-off resumes as Fed officials stay the course

BY Reuters | ECONOMIC | 09/29/22 10:19 AM EDT
       By Herbert Lash
       NEW YORK, Sept 29 (Reuters) - A sell-off in U.S.
Treasuries resumed on Thursday as Federal Reserve officials gave
no indication the U.S. central bank would moderate or change its
plans to aggressively raise interest rates to bring down high
inflation.
    Cleveland Fed President Loretta Mester said she does not see
distress in U.S. financial markets that would alter the central
bank's campaign to lower inflation through rate hikes that have
taken the fed funds rate to a range of 3.0%-3.25%.
    Mester told CNBC that she still sees inflation as the
paramount problem facing the U.S. economy, which means the Fed
needs to press forward with hiking rates to lift the federal
funds target rate to over 4%.
    "We're not at a point where we should think about stopping
on rate hikes," Mester said. "We're still not even in
restrictive territory on the funds rate."
    The two-year Treasury yield, which typically
moves in step with rate expectations, was up 11.9 basis points
at 4.213%, while the yield on benchmark 10-year notes
 was up 8.9 basis points to 3.796%.
    The 10-year's yield on Wednesday fell 25.6 basis points to
3.707%, its biggest single-day drop since March 2009 as markets
reacted to the Bank of England's intervention to halt a deep
bond sell-off and crumbling British currency.
    BoE said it would buy long-dated gilts to restore financial
market stability, a move that could lead the Fed to halt its
balance sheet reduction to avert a hard U.S. landing, said Joe
LaVorgna, chief U.S. economist at SMBC Nikko Securities in New
York.
    "It seems to me the Bank of England may have a little bit of
a template on how in the Fed's mind it may be able to get the
funds rate higher," LaVorgna said.
    "It is conceivable the Fed could take the playbook out of
BoE, the playbook in that in light of market conditions we're
either going to slow or temporarily pause on balance sheet
reduction," he said.
    The Fed is reducing its balance sheet by $60 billion of
Treasuries every month, a move that is drying up liquidity. By
stopping the run-off, rates could go higher and faster, in line
with Fed plans to quickly staunch inflation, LaVorgna said.
    The gap between yields on two- and 10-year Treasuries
, seen as a recession harbinger, steepened at -41.9
basis points.
    The 30-year yield was up 6.7 basis points to
3.748%.
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.383%.
    The 10-year TIPS breakeven rate continued to
decline and was last at 2.293%, indicating the market sees
inflation averaging just under 2.3% a year for the next decade.
    The U.S. dollar five-years forward inflation-linked swap
, seen by some as a better gauge of inflation
expectations due to possible distortions caused by the Fed's
quantitative easing, was last at 2.310%.
    Sept. 29 Thursday 10:02 AM New York / 1402 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             3.2925       3.3659    -0.008
 Six-month bills                               3.845        3.9753    0.057
 Two-year note                                 100-18/256   4.213     0.119
 Three-year note                               97-244/256   4.243     0.121
 Five-year note                                100-108/256  4.031     0.109
 Seven-year note                               99-168/256   3.9316    0.107
 10-year note                                  91-112/256   3.7976    0.091
 20-year bond                                  90-220/256   4.0487    0.064
 30-year bond                                  86-160/256   3.7478    0.067

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 29.75        -1.25
 U.S. 3-year dollar swap spread                  7.00        -1.00
 U.S. 5-year dollar swap spread                  4.00        -1.00
 U.S. 10-year dollar swap spread                 4.00        -0.75
 U.S. 30-year dollar swap spread               -43.50        -2.50

 (Reporting by Herbert Lash
Editing by Nick Zieminski)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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